Goldman Sachs starts China A-shares at Overweight

Goldman Sachs said China was its strongest Overweight market in Asia, pointing to two key catalysts: the upcoming mainland listings of China tech companies and A-share inclusion in the MSCI index.

It kept an Overweight call on offshore China equities and introduced an Overweight of onshore A-shares. The Overweight was largely based on a forecast for region-leading 21 percent earnings growth and inexpensive valuations of 12.1 times forward earnings, it said in a note earlier this week.

For the first catalyst, it noted “policy makers have clearly signaled their desire to have leading China technology companies list on the domestic market through CDRs (China depository rights),” it said. “In contrast to the regulatory headwinds facing several leading U.S. tech companies, selected China tech stocks may benefit from investor enthusiasm over a valuation and trading liquidity boost from mainland listings.”

For the second catalyst, it noted the first tranche of A-shares will be added into the MSCI global indexes at the end of May, with the next at the end of August.

“Although China A shares will only account for 0.8 percent of the MSCI Emerging Market index, the strategic importance of this move should not be underestimated, since A shares could account for 9 percent and 17 percent of the EM index as the inclusion factor rises over time to 50 percent and then 100 percent,” Goldman said.

A-share positives

It pointed to other positives for the A-share market as well.

“The full A share market has a free-float market cap of $4.2 trillion, trade $67 billion per day and has 3,244 listed shares,” it said. “This is arguably the largest and most liquid pool of unexplored potential stock picking alpha for global institutional investors, especially considering the prevalence of domestic retail investors.”

Goldman also noted that after the conclusion of the National Party Congress, China offers less political uncertainty.

“China has a clear five-year policy and stable leadership, which contrasts with lower visibility on both leadership and policy in many other
economies, both developed and emerging,” it said.

Additionally, the broad policy objectives announced at the NPC, including implementing institutional reforms and promoting market liberalization, will drive investment opportunities, Goldman said.

Among the stocks that could benefit from those policies, Goldman pointed to 10 that are on its Conviction list: Alibaba, CCB, Ping An, CNOOC, Geely Auto, AAC Tech, Sunny Optical, Shenzhou International and Shangri-La.